<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ---
ACT OF 1934
For the quarterly period ended June 30, 1994
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-8661
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THE CHUBB CORPORATION
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(Exact name of registrant as specified in its charter)
NEW JERSEY 13-2595722
- ------------------------------- --------------------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
15 MOUNTAIN VIEW ROAD, WARREN, NEW JERSEY 07061-1615
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (908) 903-2000
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
------ ------
The number of shares of common stock outstanding as of July 29, 1994 was
87,728,809.
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THE CHUBB CORPORATION
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Part I. Financial Information:
Item 1 - Financial Statements:
Consolidated Balance Sheets as of
June 30, 1994 and December 31, 1993.......................... 1
Consolidated Statements of Income for the
Three Months and Six Months Ended
June 30, 1994 and 1993....................................... 2
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1994 and 1993...................... 3
Notes to Consolidated Financial Statements.................... 4
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations.............. 6
Part II. Other Information:
Item 4 - Submission of Matters to a Vote of Security Holders.... 12
Item 6 - Exhibits and Reports on Form 8-K....................... 13
</TABLE>
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Page 1
THE CHUBB CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, Dec. 31,
1994 1993
-------- --------
(in millions)
<S> <C> <C>
Assets
Invested Assets
Short Term Investments............................... $ 670.0 $ 531.3
Fixed Maturities
Held-to-Maturity
Tax Exempt (market $3,341.4 and $6,048.4)......... 3,221.1 5,528.9
Taxable (market $655.0 and $2,726.0).............. 648.6 2,528.9
Available-for-Sale
Tax Exempt (1994 cost $2,326.3)................... 2,414.1 -
Taxable (1994 cost $4,234.3 and
1993 market $2,148.5)............................ 4,115.8 2,128.7
Equity Securities (cost $809.1 and $709.9)........... 906.9 930.0
Policy and Mortgage Loans............................ 194.4 194.3
--------- ---------
Total Invested Assets......................... 12,170.9 11,842.1
Cash................................................... 7.0 4.6
Accrued Investment Income.............................. 211.0 205.0
Premiums Receivable.................................... 832.3 720.1
Reinsurance Recoverable on Property and Casualty
Unpaid Claims......................................... 1,853.2 1,785.4
Prepaid Reinsurance Premiums........................... 427.0 427.3
Funds in Escrow - Asbestos-Related Settlement.......... 546.6 538.2
Deferred Policy Acquisition Costs
Property and Casualty Insurance...................... 509.9 489.7
Life and Health Insurance............................ 554.9 522.6
Real Estate Assets..................................... 1,730.7 1,709.0
Deferred Income Tax.................................... 272.0 229.0
Other Assets........................................... 1,055.0 963.9
--------- ---------
Total Assets.................................. $20,170.5 $19,436.9
========= =========
Liabilities
Property and Casualty Unpaid Claims.................... $ 8,598.1 $ 8,235.4
Life and Health Policy Liabilities..................... 2,535.4 2,446.6
Unearned Premiums...................................... 2,271.6 2,180.0
Short Term Debt........................................ 118.4 94.9
Long Term Debt......................................... 1,290.9 1,273.8
Dividend Payable to Shareholders....................... 40.4 37.7
Accrued Expenses and Other Liabilities................. 1,068.3 972.4
--------- ---------
Total Liabilities............................. 15,923.1 15,240.8
--------- ---------
Shareholders' Equity
Common Stock - $1 Par Value; 87,759,998 and
87,709,465 Shares..................................... 87.8 87.7
Paid-In Surplus........................................ 784.9 782.2
Retained Earnings...................................... 3,452.2 3,313.1
Foreign Currency Translation Gains, Net of Income Tax.. 2.3 0.3
Unrealized Appreciation of Investments, Net............ 46.9 143.1
Receivable from Employee Stock Ownership Plan.......... (126.7) (130.3)
--------- ---------
Total Shareholders' Equity.................... 4,247.4 4,196.1
--------- ---------
Total Liabilities and Shareholders' Equity.... $20,170.5 $19,436.9
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 4
Page 2
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
PERIODS ENDED JUNE 30
<TABLE>
<CAPTION>
Second Quarter Six Months
-------------- --------------
1994 1993 1994 1993
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Revenues
Premiums Earned and Policy Charges.... $1,149.0 $1,007.5 $2,282.7 $1,984.2
Investment Income..................... 200.7 196.5 403.9 389.6
Real Estate........................... 49.6 35.9 93.4 71.7
Realized Investment Gains............. 15.3 43.7 30.6 75.6
-------- -------- -------- --------
Total Revenues................. 1,414.6 1,283.6 2,810.6 2,521.1
-------- -------- -------- --------
Benefits, Claims and Expenses
Insurance Claims and Policyholders'
Benefits............................. 791.0 682.0 1,684.4 1,350.7
Amortization of Deferred Policy
Acquisition Costs.................... 274.8 245.1 546.2 494.7
Other Insurance Operating Costs and
Expenses............................. 105.1 100.2 208.3 192.8
Real Estate Cost of Sales and Expenses 50.3 35.4 94.7 70.7
Investment Expenses................... 2.4 2.0 6.9 5.2
Corporate Expenses.................... 8.5 7.6 17.9 15.8
-------- -------- -------- --------
Total Benefits, Claims and
Expenses...................... 1,232.1 1,072.3 2,558.4 2,129.9
-------- -------- -------- --------
Income Before Federal and Foreign
Income Tax............................. 182.5 211.3 252.2 391.2
Federal and Foreign Income Tax.......... 35.8 42.8 32.3 76.9
-------- -------- -------- --------
Income Before Cumulative Effect of
Changes in Accounting Principles....... 146.7 168.5 219.9 314.3
Cumulative Effect of Changes in
Accounting Principles, Net of Tax...... - - - (20.0)
-------- -------- -------- --------
Net Income.............................. $ 146.7 $ 168.5 $ 219.9 $ 294.3
======== ======== ======== ========
Average Common and Common Equivalent
Shares Outstanding (In Thousands)...... 90,654 90,540 90,640 90,502
PER SHARE DATA
- --------------
Income Before Cumulative Effect of
Changes in Accounting Principles....... $ 1.65 $ 1.89 $ 2.48 $ 3.53
Cumulative Effect of Changes in
Accounting Principles.................. - - - (.22)
-------- -------- -------- --------
Net Income.............................. $ 1.65 $ 1.89 $ 2.48 $ 3.31
======== ======== ======== ========
Dividends Declared...................... $ .46 $ .43 $ .92 $ .86
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 5
Page 3
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30
<TABLE>
<CAPTION>
1994 1993
---- ----
(in millions)
<S> <C> <C>
Cash Flows from Operating Activities
Net Income............................................. $ 219.9 $ 294.3
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Increase in Property and Casualty Unpaid Claims, Net. 294.9 221.9
Increase in Unearned Premiums, Net................... 91.9 93.0
Increase in Premiums Receivable...................... (112.2) (81.0)
Increase in Deferred Policy Acquisition Costs........ (47.5) (47.0)
Deferred Income Tax (Credit)......................... 13.1 (18.5)
Realized Investment Gains............................ (30.6) (75.6)
Cumulative Effect of Changes in Accounting Principles - 20.0
Other, Net........................................... 23.3 81.4
--------- ---------
Net Cash Provided by Operating Activities.............. 452.8 488.5
--------- ---------
Cash Flows from Investing Activities
Proceeds from Sales of Fixed Maturities................ 1,499.4 1,397.4
Proceeds from Maturities of Fixed Maturities........... 296.6 324.7
Proceeds from Sales of Equity Securities............... 154.4 157.6
Purchases of Fixed Maturities.......................... (2,063.0) (1,510.7)
Purchases of Equity Securities......................... (205.6) (138.0)
Increase in Short Term Investments, Net................ (138.7) (496.7)
Increase in Net Receivable from Security
Transactions Not Settled.............................. (4.2) (166.6)
Additions to Real Estate Properties, Net............... (23.2) (27.5)
Other, Net............................................. (27.8) (27.7)
--------- ---------
Net Cash Used in Investing Activities.................. (512.1) (487.5)
--------- ---------
Cash Flows from Financing Activities
Deposits Credited to Policyholder Funds................ 158.7 139.6
Withdrawals from Policyholder Funds.................... (63.7) (52.9)
Proceeds from Issuance of Long Term Debt............... 33.2 254.3
Repayment of Long Term Debt............................ (16.1) (54.3)
Increase (Decrease) in Short Term Debt, Net............ 23.5 (218.5)
Dividends Paid to Shareholders......................... (78.1) (72.7)
Other, Net............................................. 4.2 6.3
--------- ---------
Net Cash Provided by Financing Activities.............. 61.7 1.8
--------- ---------
Net Increase in Cash..................................... 2.4 2.8
Cash at Beginning of Year................................ 4.6 6.7
--------- ---------
Cash at End of Period.................................. $ 7.0 $ 9.5
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
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THE CHUBB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) General
The amounts included in this report are unaudited but include
those adjustments, consisting of normal recurring items, which
management considers necessary for a fair presentation. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes in the 1993 Annual
Report to Shareholders.
2) Changes in Accounting Principles
Effective January 1, 1994, the Corporation adopted Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Similar to the Corporation's
previous accounting policy for investments in fixed maturities and
equity securities, SFAS No. 115 provides that the accounting for such
securities depends on their classification as either held-to-maturity
(previously referred to as held for investment), available-for-sale or
trading. However, SFAS No. 115 establishes more stringent criteria for
classifying fixed maturities as held-to-maturity. Therefore, the
adoption of SFAS No. 115 resulted in an increase in the portion of the
Corporation's fixed maturities classified as available-for-sale and a
similar decrease in those classified as held-to-maturity. SFAS No. 115
also requires that fixed maturities classified as available-for-sale be
carried at market value, with unrealized appreciation or depreciation
excluded from income and credited or charged directly to a separate
component of shareholders' equity. Previously, such fixed maturities
were carried at the lower of the aggregate amortized cost or market
value. In conjunction with the Corporation's adoption of SFAS No. 115,
deferred policy acquisition costs related to interest-sensitive life
insurance contracts were adjusted to reflect the effects that would have
been recognized had the unrealized gains relating to investments
classified as available-for-sale actually been realized, with a
corresponding charge directly to the separate component of shareholders'
equity. SFAS No. 115 may not be retroactively applied to prior years'
financial statements. The cumulative effect, as of January 1, 1994, of
the change in accounting principle was an increase in shareholders'
equity of $220.5 million, net of the related adjustment to deferred
policy acquisition costs of $60.7 million and deferred income taxes of
$118.8 million. Adoption of the Statement did not have an impact on net
income in the first six months of 1994 nor will it in future periods.
In the first quarter of 1993, the Corporation adopted SFAS No.
106, Employers' Accounting for Postretirement Benefits Other Than
Pensions, and SFAS No. 109, Accounting for Income Taxes. SFAS No. 106
requires the Corporation to accrue the expected cost of providing
postretirement benefits, principally health care and life insurance, to
employees and their beneficiaries and covered dependents during the
years that the employees render the necessary service. The transition
obligation of $89.4 million, which represents the unfunded and
unrecognized accumulated postretirement benefit obligation as of January
1, 1993, was recognized in the first quarter of 1993 as the cumulative
effect of a change in accounting principle. The cumulative effect, net
of related income tax benefits of $30.4 million, was a decrease in net
<PAGE> 7
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income of $59.0 million or $.65 per share. SFAS No. 109 prescribes an
asset and liability method of accounting for income taxes, the objective
of which is to recognize an asset or liability for the expected future
tax effects attributable to temporary differences between the financial
reporting and tax bases of assets and liabilities, based on the enacted
tax rates and other provisions of tax law. SFAS No. 109 was implemented
by including the cumulative effect of the change in accounting principle
in net income in the first quarter of 1993. Such cumulative effect was
an increase in net income of $39.0 million or $.43 per share. Excluding
the cumulative effect adjustments, the adoption of the two Statements
did not have a significant impact on net income in the first six months
of 1994 or 1993.
3) Investments
Short term investments, which have an original maturity of one
year or less, are carried at amortized cost which approximates market
value. Fixed maturities considered held-to-maturity are carried at
amortized cost. Fixed maturities considered available-for-sale are
carried at market value as of the balance sheet date. Prior to 1994,
fixed maturities considered available-for-sale were carried at the lower
of the aggregate amortized cost or market value as of the balance sheet
date. Equity securities are carried at market value as of the balance
sheet date.
The net change in unrealized appreciation of investments carried
at market value was as follows:
<TABLE>
<CAPTION>
Periods Ended June 30
--------------------------------
Second Quarter Six Months
-------------- ---------------
1994 1993 1994 1993
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Change in unrealized appreciation of
equity securities...................... $ (38.5) $24.5 $(122.3) $32.1
Change in unrealized appreciation of
fixed maturities....................... (155.7) - (430.7) -
Change in deferred policy acquisition
cost adjustment........................ 28.1 - 65.7 -
------- ----- ------- -----
(166.1) 24.5 (487.3) 32.1
Deferred income tax (credit).......... (58.2) 8.3 (170.6) 10.9
------- ----- ------- -----
(107.9) 16.2 (316.7) 21.2
Cumulative effect, as of January 1,
1994, of change in accounting
principle, net......................... - - 220.5 -
------- ----- ------- -----
Change in unrealized appreciation of
investments, net....................... $(107.9) $16.2 $ (96.2) $21.2
======= ===== ======= =====
</TABLE>
4) Per Share Data
Earnings per share amounts are based on the weighted average
number of common and common equivalent shares outstanding. The 6%
guaranteed exchangeable subordinated notes are considered to be common
equivalent shares. The computation assumes the addition to income of
the after-tax interest expense applicable to such notes.
<PAGE> 8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1994 AND
1993 AND FOR THE QUARTERS ENDED JUNE 30, 1994 AND 1993
PROPERTY AND CASUALTY INSURANCE
Earnings from our property and casualty business were substantially
lower in the first six months of 1994 compared with the same period of 1993.
The decrease was due to a significant decline in underwriting results in 1994
caused by substantial catastrophe losses in the first quarter. Investment
income increased modestly in 1994 compared with 1993. Property and casualty
income after taxes amounted to $187.6 million in the first six months of 1994
and $132.2 million in the second quarter compared with $228.7 million and
$119.5 million, respectively, in 1993.
Net premiums written were $1.9 billion in the first six months of 1994
and $1.0 billion in the second quarter, representing increases of 11.9% and
12.1%, respectively, over the comparable periods of 1993. The marketplace
continued to be competitive, particularly in the commercial classes. Property
related business has experienced some rate firming but price increases in
casualty lines continued to be difficult to achieve. Premium growth was due
primarily to the selective writing of new business, improved renewal retention
of customers who appreciate the stability, expertise and added value we
provide, and exposure growth on existing business.
Underwriting results were unprofitable in the first six months of 1994
compared with profitable results for the same period in 1993. Underwriting
results were profitable in the second quarter of both years. Our combined loss
and expense ratio was 103.0% in the first six months of 1994 and 96.3% in the
second quarter compared with 98.9% and 98.0%, respectively, in 1993.
The loss ratio was 70.1% for the first six months of 1994 and 63.8% for
the second quarter compared with 64.9% and 64.6%, respectively, in the prior
year. The loss ratio deteriorated in the first six months of 1994 due to
higher catastrophe losses in the first quarter, resulting primarily from the
earthquake in California and the winter storms in the eastern and midwestern
parts of the United States. Catastrophe losses in the first six months of 1994
amounted to $160.3 million which represented 8.7 percentage points of the loss
ratio compared with $45.3 million or 2.8 percentage points in 1993.
Catastrophe losses for the second quarter of 1994 amounted to $12.9 million or
1.4 percentage points of the loss ratio compared with $16.5 million or 2.0
percentage points in 1993.
Our expense ratio was 32.9% for the first six months of 1994 and 32.5%
for the second quarter compared with 34.0% and 33.4%, respectively, in 1993.
The decrease in 1994 was due primarily to growth in written premiums at a
greater rate than the increase in overhead expenses. Expenses were reduced in
the first six months of 1994 and 1993 by contingent profit sharing accruals of
$4.0 million ($2.0 million per quarter) relating to a medical malpractice stop
loss reinsurance agreement. Quarterly accruals similar to those in the first
two quarters are anticipated during the remainder of 1994.
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Underwriting results during 1994 and 1993 by class of business were as
follows:
<TABLE>
<CAPTION>
Six Months Ended June 30
--------------------------------------
Net Premiums Combined Loss and
Written Expense Ratios
-------------- -----------------
1994 1993 1994 1993
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Personal Insurance
Automobile........................ $ 94.6 $ 98.2 95.6% 98.3%
Homeowners........................ 213.8 208.0 129.7 102.4
Other............................. 99.4 97.4 86.7 86.2
-------- -------- ----- -----
407.8 403.6 111.5 97.5
-------- -------- ----- -----
Standard Commercial Insurance
Multiple Peril.................... 300.3 262.9 115.9 108.0
Casualty.......................... 284.3 257.1 104.8 98.5
Workers' Compensation............. 94.7 87.8 107.9 116.9
-------- -------- ----- -----
679.3 607.8 110.1 105.2
-------- -------- ----- -----
Specialty Commercial Insurance
Fidelity and Surety............... 344.8 296.0 80.0 81.2
Other............................. 390.4 327.2 101.6 100.7
-------- -------- ----- -----
735.2 623.2 91.2 91.0
-------- -------- ----- -----
Reinsurance Assumed................. 110.9 92.7 106.3 118.0
-------- -------- ----- -----
Total........................... $1,933.2 $1,727.3 103.0% 98.9%
======== ======== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended June 30
--------------------------------------
Net Premiums Combined Loss and
Written Expense Ratios
-------------- -----------------
1994 1993 1994 1993
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Personal Insurance
Automobile........................ $ 49.7 $ 52.0 96.2% 96.4%
Homeowners........................ 118.6 117.1 105.2 90.3
Other............................. 55.0 53.5 76.3 83.6
-------- -------- ----- -----
223.3 222.6 96.2 90.2
-------- -------- ----- -----
Standard Commercial Insurance
Multiple Peril.................... 163.9 141.8 103.5 114.9
Casualty.......................... 148.2 135.7 106.0 101.4
Workers' Compensation............. 45.4 41.8 104.4 116.5
-------- -------- ----- -----
357.5 319.3 105.1 109.5
-------- -------- ----- -----
Specialty Commercial Insurance
Fidelity and Surety............... 191.0 160.8 77.3 78.6
Other............................. 201.3 170.7 96.5 98.2
-------- -------- ----- -----
392.3 331.5 87.1 88.5
-------- -------- ----- -----
Reinsurance Assumed................. 47.1 36.5 108.7 129.3
-------- -------- ----- -----
Total........................... $1,020.2 $ 909.9 96.3% 98.0%
======== ======== ===== =====
</TABLE>
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PERSONAL INSURANCE
Premiums from personal insurance coverages, which represent
approximately 21% of the premiums written by our property and casualty
insurance subsidiaries, increased 1.0% in the first six months of 1994 and less
than 1% in the second quarter compared with the similar periods in 1993. It
continues to be difficult to write new homeowners and other non-automobile
business due to our disciplined pricing. Rates for these coverages have not
increased during the past year. Personal automobile premiums decreased
modestly in 1994, which is consistent with our plan to control our exposure
in this class.
Our personal insurance business produced unprofitable underwriting
results in the first six months of 1994 due to the adverse effect
of the significant catastrophe losses in the first quarter. Underwriting
results were profitable for the first six months of 1993 and for the second
quarter of both 1994 and 1993. The combined loss and expense ratios were
111.5% for the first six months of 1994 and 96.2% for the second quarter
compared with 97.5% and 90.2%, respectively, in 1993. Significant
weather-related catastrophe losses in the first quarter adversely affected
homeowners results in the first six months of 1994 and, to a lesser extent, in
1993. Homeowners results in the second quarter of 1994 were adversely affected
by higher catastrophe losses compared with the same period in the prior year.
Catastrophe losses for this class represented 34.7 percentage points of
the loss ratio for the first six months of 1994 and 16.8 percentage points for
the second quarter compared with 14.2 and 4.7 percentage points, respectively,
in the comparable 1993 periods. Other personal coverages, which include
insurance for personal valuables and excess liability, produced profitable
results in 1994 and 1993. Improvement in personal excess liability results in
1994 due to favorable loss experience was offset by the adverse effect of
losses of personal valuables resulting from the earthquake in California.
Catastrophe losses represented 10.2 percentage points of the loss ratio for
other personal coverages in the first six months of 1994 compared with less
than 1 percentage point in 1993. Our automobile business produced profitable
results in 1994 and 1993.
STANDARD COMMERCIAL INSURANCE
Premiums from standard commercial insurance, which include multiple
peril, casualty and workers' compensation, and which represent approximately
35% of our total writings, increased 11.8% in the first six months of 1994 and
12.0% in the second quarter compared with the similar periods in 1993. The
competitive market has continued to place significant pressure on prices.
Premium growth was due primarily to a combination of the disciplined writing of
new accounts, improved renewal retention and exposure growth on existing
business.
Our standard commercial business produced unprofitable underwriting
results in both 1994 and 1993. The combined loss and expense ratios were
110.1% for the first six months of 1994 and 105.1% for the second quarter
compared with 105.2% and 109.5%, respectively, in 1993. Multiple peril results
deteriorated in the first six months of 1994 due to the adverse effect of
significant catastrophe losses in the first quarter, resulting primarily from
the earthquake in California. Catastrophe losses for the multiple peril class
in the first six months of 1994 represented 19.2 percentage points of the loss
ratio compared with only 3.3 percentage points in 1993. Multiple peril
results, excluding the impact of catastrophes, improved in the first six months
of 1994 due to stable loss frequency and severity. Multiple peril results in
the second quarter of 1994 benefitted from favorable development on prior
period catastrophe losses.
<PAGE> 11
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The excess liability component of our casualty coverages deteriorated
somewhat in 1994 due to several large losses but remained profitable. These
favorable results were offset in varying degrees in 1994 and 1993 by the need
to increase reserves for asbestos-related and toxic waste claims. Results in
the automobile component were profitable in 1994 and 1993. Workers'
compensation results improved in 1994 but remained unprofitable. Results in
this class were aggravated in both years, but more so in 1993, by our share of
the significant losses incurred by the involuntary pools and mandatory business
in which we must participate by law.
SPECIALTY COMMERCIAL INSURANCE
Premiums from specialty commercial business, which represent
approximately 38% of our total writings, increased by 18.0% in the first six
months of 1994 and 18.3% in the second quarter compared with the same periods a
year ago. The increase was due to new business opportunities and rate and
exposure increases. Our strategy of working closely with our customers and our
ability to differentiate our products has enabled us to retain a large
percentage of our business.
Our specialty commercial business produced substantial underwriting
profits in both 1994 and 1993. The combined loss and expense ratios were 91.2%
for the first six months of 1994 and 87.1% for the second quarter compared with
91.0% and 88.5%, respectively, in 1993. Our executive protection and financial
fidelity results were highly profitable in both years due to favorable loss
experience. Surety results were also profitable in 1994 and 1993. Marine
results were unprofitable in the first six months of 1994 compared with
profitable results in 1993. The deterioration was due to significant
catastrophe losses in the first quarter, resulting primarily from the
earthquake in California. Results in several of our smaller specialty classes
improved in 1994.
REINSURANCE ASSUMED
Premiums from reinsurance assumed, which is primarily treaty reinsurance
from the Sun Alliance Group plc, represent approximately 6% of our total
premium writings. Premiums increased 19.6% in the first six months of 1994 and
29.0% in the second quarter compared with the same periods in 1993 due
primarily to an increase in our participation in the business of Sun Alliance.
Underwriting results for this segment improved significantly in 1994 compared
with the prior year but remained unprofitable.
We have further increased our participation in the business of Sun
Alliance. Such increase in premiums written will be first reported in our
third quarter results.
LOSS RESERVES
Loss reserves, net of reinsurance recoverable, increased by $294.9
million during the first six months of 1994. Unpaid claims related to the
catastrophes in the first quarter of 1994 contributed a portion of the
increase. Loss reserves were reduced during the first six months of 1994 by
payments aggregating $84 million related to pending asbestos-related bodily
injury claims against Fibreboard Corporation. A discussion of the Fibreboard
settlement is incorporated by reference from Item 7 of the Registrant's Form
10-K for the year ended December 31, 1993.
<PAGE> 12
Page 10
INVESTMENTS
Investment income after deducting expenses and taxes increased by 4.1%
in the first six months of 1994 and 3.2% in the second quarter compared with
the comparable periods in 1993. The growth was due primarily to an increase in
invested assets since the second quarter of 1993, reflecting the strong cash
flow from operations. The effective tax rate on investment income increased to
14.7% in the first six months of 1994 from 13.4% in 1993 due primarily to the
increase in the federal corporate tax rate from 34% to 35%. In the first six
months of 1994, new cash was invested primarily in taxable bonds and we also
increased our short term investments. We maintain investments in highly liquid
short term securities at all times to provide for immediate cash needs. At
June 30, 1994, such investments were at a higher than normal level so that
funds are readily available to pay amounts related to the Fibreboard
settlement.
LIFE AND HEALTH INSURANCE
The life and health insurance subsidiaries had earnings after taxes of
$12.0 million for the first six months of 1994 compared with $29.0 million in
1993. Total life and health insurance premiums and policy charges amounted to
$441.4 million in the first six months of 1994 compared with $349.9 million
in 1993.
Premiums and policy charges for personal insurance amounted to $130.3
million in the first six months of 1994, an increase of 12.9% from the same
period in 1993. Earnings in personal lines were $19.4 million in the first six
months of 1994 compared with $18.8 million in 1993. The 1994 earnings
increase was due to the favorable settlement of litigation in the second
quarter related to certain previously purchased software systems. Tax benefits
of $1.5 million were recognized in the second quarter of 1993 as a result of
settlement of prior years' taxes.
Premium revenue for group insurance was $311.1 million for the first six
months of 1994 and $149.0 million for the second quarter, representing
increases of 32.7% and 17.1%, respectively, compared with the same periods in
1993. Due to legislation which became effective in April 1993 in New York,
which is our major market, several insurers reduced their market share in the
small group health segment. We offered a competitive product and
thus substantially increased our sales in that market. The growth in premium
revenue in 1994 reflected the effect of the significant increase in new
policies during the last three quarters of 1993. Due to increased levels of
competition in the small group market in 1994 as well as our significant rate
increases, some of the new policies written in 1993, which became eligible for
renewal in April 1994, were not renewed. We anticipate that this trend will
continue during the remainder of 1994. Group insurance operations resulted in
a loss of $7.4 million for the first six months of 1994 compared with income of
$10.2 million for the same period in 1993. The deterioration was due to
significantly greater claim activity related to group health policies than was
anticipated when new rates were developed in 1993. While we have increased
rates substantially, we expect group health earnings to be lower throughout the
remainder of 1994 than they were in the comparable 1993 period.
Gross investment income increased by 2.9% in the first six months of
1994 over the same period in 1993. New cash was invested in mortgage-backed
and corporate securities. To provide for liquidity, funds believed to be
sufficient to meet any unusual needs for cash have been maintained in short
term securities.
<PAGE> 13
Page 11
REAL ESTATE
Real estate operations resulted in a loss after taxes of $1.0 million
for the first six months of 1994 compared with income of $0.5 million in 1993.
Earnings were adversely affected in both periods, but somewhat more so in 1994,
by increased portions of interest costs being charged directly to expense
rather than being capitalized as well as increases in the provision for
possible uncollectible receivables related to mortgages. Revenues were $93.4
million in the first six months of 1994 compared with $71.7 million in 1993.
CORPORATE
In July 1994, the Corporation replaced its $300 million revolving credit
agreement which would have terminated in November 1994 with a new agreement
which will provide for unsecured borrowings of up to the same amount. The new
agreement includes generally the same terms and conditions as the previous
agreement and will terminate in July 1997.
INVESTMENT GAINS AND LOSSES
Decisions to sell securities are governed principally by considerations
of investment opportunities and tax consequences. As a result, realized
investment gains and losses may vary significantly from period to period.
Investment gains before taxes of $30.6 million were realized in the first six
months of 1994 compared with gains of $75.6 million for the same period in
1993. The higher gains in 1993 were due primarily to the sale of fixed
maturities as part of the realignment of our portfolio.
CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1, 1994, the Corporation adopted Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. As a result, a substantial portion
of our fixed maturity portfolio is now carried at market value, with unrealized
appreciation or depreciation excluded from income and credited or charged
directly to a separate component of shareholders' equity. The cumulative
effect of this change in accounting principle was an increase in shareholders'
equity of $220.5 million as of January 1, 1994. However, due to the rising
interest rates in the first six months of 1994 and the resulting decrease in
the market value of fixed maturities, the effect of this change in accounting
principle on shareholders' equity at June 30, 1994 was a reduction of $16.7
million. The adoption of SFAS No. 115 did not have an impact on net income in
the first six months of 1994. At June 30, 1994, the unrealized appreciation of
that portion of our fixed maturity portfolio still carried at amortized cost
was $127 million. Such unrealized appreciation was not reflected in the
consolidated financial statements.
In the first quarter of 1993, the Corporation adopted SFAS No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions, and SFAS
No. 109, Accounting for Income Taxes. Net income in the first quarter of 1993
reflected a one-time charge of $20.0 million for the cumulative effect of these
changes in accounting principles.
These changes in accounting principles are discussed further in Note 2
of the Notes to Consolidated Financial Statements.
<PAGE> 14
Page 12
PART II. OTHER INFORMATION
---------------------------
Item 4 - Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
The Annual Meeting of Shareholders of The Chubb Corporation was held on
April 26, 1994. Matters submitted to Shareholders at the meeting were as
follows:
Votes were cast in the following manner in connection with the election
of each Director to serve until the next Annual Meeting of Shareholders.
<TABLE>
<CAPTION>
Director Votes For Votes Against
- -------- --------- -------------
<S> <C> <C>
John C. Beck 74,775,408 9,971
Percy Chubb, III 74,589,882 195,497
Joel J. Cohen 74,739,817 45,562
Henry U. Harder 74,579,199 206,180
Robert V. Lindsay 74,758,010 27,369
Thomas C. MacAvoy 74,773,320 12,059
Gertrude G. Michelson 73,969,993 815,386
Dean R. O'Hare 74,594,451 190,928
Ernesta G. Procope 74,559,589 225,790
Warren B. Rudman 74,573,801 211,578
David G. Scholey 74,575,964 209,415
Lawrence M. Small 74,599,990 185,389
Richard D. Smith 74,589,333 196,046
Robert G. Stone, Jr. 74,761,347 24,032
Richard D. Wood 74,590,703 194,676
</TABLE>
For each Director, there were 661,711 abstaining votes. There were no
broker non-votes cast.
Votes were cast in the following manner in connection with the proposal
to approve the selection of Ernst & Young as the independent auditors of the
Registrant for the year 1994.
<TABLE>
<CAPTION>
Votes For Votes Against
--------- -------------
<S> <C>
75,177,462 131,656
</TABLE>
There were 137,972 abstaining votes and no broker non-votes cast.
Votes were cast in the following manner in connection with the proposal
to approve The Chubb Corporation Annual Incentive Compensation Plan (1994).
<TABLE>
<CAPTION>
Votes For Votes Against
--------- -------------
<S> <C>
73,734,730 1,289,775
</TABLE>
There were 422,585 abstaining votes and no broker non-votes cast.
<PAGE> 15
Page 13
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
A. Exhibit 11.1 - Computation of earnings per share.
B. Reports on Form 8-K - There were no reports on Form 8-K filed for the three
months ended June 30, 1994.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, The
Chubb Corporation has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE CHUBB CORPORATION
(Registrant)
By: /s/ Henry B. Schram
-------------------------------
Henry B. Schram
Senior Vice-President and
Chief Accounting Officer
Date: August 12, 1994
<PAGE> 16
INDEX TO EXHIBIT
----------------
EXHIBIT NO. DESCRIPTION
----------- -----------
11.1 Computation of earnings per share.
<PAGE> 1
Exhibit 11.1
THE CHUBB CORPORATION
COMPUTATION OF EARNINGS PER SHARE
PERIODS ENDED JUNE 30
<TABLE>
<CAPTION>
Second Quarter Six Months
-------------- -------------
1994 1993 1994 1993
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Net income.................................. $146.7 $168.5 $219.9 $294.3
After-tax interest expense on 6% guaranteed
exchangeable subordinated notes............ 2.5 2.5 4.9 5.0
------ ------ ------ ------
Net income for computing earnings per share. $149.2 $171.0 $224.8 $299.3
====== ====== ====== ======
Average number of common shares
outstanding................................ 87.8 87.6 87.7 87.6
Additional shares from assumed conversion
of 6% guaranteed exchangeable subordinated
notes as if each $1,000 of principal
amount had been converted at issuance
into 11.628 shares of common stock......... 2.9 2.9 2.9 2.9
------ ------ ------ ------
Average number of common and common
equivalent shares assumed outstanding for
computing earnings per share............... 90.7 90.5 90.6 90.5
====== ====== ====== ======
Net income per share........................ $ 1.65 $ 1.89 $ 2.48 $ 3.31
</TABLE>
